Why in-flight Wi-Fi pioneer Gogo is losing altitude

Gogo, which has endured a bumpy flight in bringing Wi-Fi to the skies, could be in for a lot more turbulence.

Competitors are circling its big customers, promising better service at lower prices—raising the prospect that Gogo could lose the race to dominate an industry it created.

Gogo is one of Chicago's tech anchors. But its stock has fallen 43 percent from a high of $19.21 on Dec. 4 amid fears that the company, still on the runway to profitability, is under threat. One of its largest shareholders, Lord Abbett, recently sold its 5 percent stake.

Gogo went public in 2013 at $17 per share as the dominant provider of in-flight Wi-Fi on commercial aircraft in North America, with the majority of the big U.S. airlines, including Delta, American and Virgin America, under long-term contracts.

But last month, American sued to get out of its contract with Gogo to switch to ViaSat's service on about 200 of the 1,500 planes in its fleet. ViaSat offers service that's faster and, analysts believe, up to 30 percent cheaper than Gogo's original technology, which uses a ground-based cellular network that the company built 10 years ago.

American withdrew the suit, but Gogo must fight to keep the business.

“The chances of them keeping American aren't that great,” says Andrew DeGasperi, an analyst at Macquarie Group in New York. “If they do, the question will be: At what cost? Delta (its biggest customer) would want a similar deal. Either way, I don't think it's a good position to be in. The chances of 200 aircraft leaving are pretty high.”

ViaSat claims its satellite service is three to four times faster than Gogo's original technology. Gogo says its new satellite-based service, which it calls 2Ku, can easily match the Carlsbad, Calif.-based rival.

“Today we have the lowest bandwidth costs and the best speeds,” says Gogo CEO Michael Small.

ViaSat, a satellite communications provider that beams Internet service to 700,000 residential customers, has moved into the airline Wi-Fi game in the past two years. It's one of several competitors—including Panasonic, Inmarsat and Global Eagle—chasing the business pioneered by Gogo.

Gogo has more than 2,500 commercial aircraft using its service. ViaSat has lined up nearly 500 in two years, including 300 United aircraft, many of which are former Continental planes, and 170 at JetBlue. United also has some aircraft with Gogo's service. Virgin America, an early Gogo customer, is putting ViaSat on 10 new planes.

“Six to 12 months ago, the suggestion from Gogo was that 'North America is done, and we're off to grow the international market,' ” says Tim Farrar, president of Telecom Media & Finance Associates, a consulting and research firm in Menlo Park, Calif. Now, however, “North America is up for grabs again.”

Gogo, which has about 70 percent market share, has been developing its technology for two decades. Until the past couple of years, the biggest question for Gogo was whether anyone would want Internet service in the air. Now they want to stream video.

Gogo's original technology wasn't built for that, and its new service has been slow to roll out. “The challenge is how fast can you get it on planes?” Small says.

FEDERAL HURDLE

Gogo's biggest obstacle is winning FAA approval for each type of aircraft. Planes only recently began flying with its new 2Ku service. Gogo expects to outfit about 75 aircraft this year but quadruple the number next year.

Airlines are constantly ordering new planes, giving them the chance to shop Gogo's deep-pocketed rivals who have other businesses besides in-flight Wi-Fi.

Panasonic Avionics, which sells onboard entertainment equipment for planes, is part of a Japanese electronics giant with a market value of $20 billion and $68 billion in annual sales. ViaSat is three times Gogo's size, with a $3.7 billion market value and $1.4 billion in sales. Gogo has a market value of $1 billion.

Small says Gogo, which borrowed $362 million last year, has enough capital to reach profitability. The worst of its capital outlays are in the past because it doesn't have to build another cellular network, and the price it pays for satellite bandwidth has dropped by two-thirds in the past year. Airlines pay for the cost of the equipment it installs on aircraft.

Gogo had $500.9 million in revenue last year, up 23 percent from 2014. Analysts predict 17 percent growth this year to $586 million, according to Thomson Reuters.

“This company's future is based on growth in revenue and growth in aircraft,” Farrar says. “And if ViaSat cuts into that, they're going to have a big, big problem.”

Small acknowledges that the nature of the game is shifting as the market matures. But he doesn't see a change in the outcome.

“We're going to do very well,” says Small, who's banking, in part, on a pipeline of 800 aircraft. “I will not predict we win every (deal), and I will not predict we'll have exclusivity relationships with most of the particular airlines. That doesn't mean you can't be the leader.”

Analysts see another possible scenario. “Ultimately, there will have to be consolidation,” Farrar says. “It's unclear how it all ends.”

Chicago, which counts Gogo among its largest tech employers with about 1,000 workers, needs the company to be a survivor.